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To make the leap from theory to reality, crowdfunding
will require the core elements of entrepreneurial spirit: a
tolerance for risk and an urgency to execute on a great idea.

Sadly, both of those qualities are in short supply in Washington,
D.C.

While the U.S. government slid under its New Year deadline to
avert the fiscal cliff, it blew right past its milestone calling
for a comprehensive set of rules to control crowdfunding, where
small firms sell equity stakes
without having to go through the expensive registration
traditionally required by regulators.

In theory, everyday investors will be able to buy a piece of a
future Facebook without a pile of venture capital and a slick
office in Silicon Valley.

And entrepreneurs with a great idea will be able to get capital
when angels are hard to come by and banks are loath to
lend.

The market need for greater capital access for startups has not
abated. In the past four years, almost half of small businesses
have not been able to secure as much capital as they would have
liked and 38 percent had loans and lines of credit either reduced
or revoked, according to a May survey of businesses with fewer
than 500 employees by the National Small Business Association.

For example, BrainThrob Laboratories Inc., a startup with a
software-based service to streamline corporate recruiting, hasn't
been able to secure $1 million to hire staff to sell its product
and teach clients how to use it. The venture-capital community
has been receptive, according to founder Erin DeSpain, but keeps
asking for the market validation, such as growing sales -- plans
which BrainThrob can't afford at the moment.

"What I really like about the crowdfunding concept is that the
people who are investors in your business are possibly the same
people who are customers in your business," says DeSpain, whose
company is based on the outskirts of Richmond, Va. "The fact that
you can put your money in something that you really believe in is
evidence to me of how capitalism should work."

So when will entrepreneurs like DeSpain be able to sell startup
stock? Probably not until the second half of this year or early
2014, according to the cadre of policy and crowdfunding experts
interviewed for this piece.

Although President Obama signed the JOBS Act and its crowdfunding
provisions in April, the SEC needs to finalize rules to govern
roughly 20 different aspects of the nascent market. And the SEC,
at the moment, is making the House of Representatives look like a
paragon of efficiency.

In part because of recent defections at a number of high posts --
including the exit of SEC Chairman Mary Schapiro -- the
commission has yet to hammer out about one-third of the details
called for in the 2010 Dodd-Frank financial reform law. It also
hasn't made much progress on an earlier provision of the JOBS
Act, which allows startups and small businesses to advertise
investment opportunities to corporations and wealthy
individuals.

"It seems like everything is at a standstill," said a
congressional aide familiar with the legislation. "And every
month that goes by, the final measures get pushed 60 days in the
future."

The good news is that the SEC staff has largely completed the
background work on the law. But progress could be scarce until a
fifth commissioner is instated to break the party split on the
current four-member commission.

And don't forget there will be a 90-day public comment period on
any proposed rules before the final measures are crafted and put
to a vote.

If incoming SEC Chairman Elisse Walter plans to move forward on
crowdfunding before a fifth commissioner is named, there could be
some kind of action in the first quarter, according to industry
sources. But there's currently no consensus on when to expect the
next step.

The Issues
The devil, as they say, will be
in the details. Here's what's in play for each group of
stakeholders.

Entrepreneurs: The law calls for third-party
audits of firms looking to raise more than $500,000.
Entrepreneurs like DeSpain argue that such accounting reviews
would burn up to 15 percent of any money raised.

Intermediaries: The companies -- or "portals"
-- facilitating crowdfunded offerings won't have to be
certified broker-dealers, but they will be regulated
nonetheless.

"You're going to have unsophisticated investors and
unsophisticated issuers, so you're going to need the portals to
be the grown-ups in the room," said Barbara Roper, director of
investor protection for the Consumer Federation of America, which
was opposed to the legislation from the start.

Crowdfunding middlemen, which may include such firms as
Indiegogo, Kickstarter and RocketHub, will have to show
regulators that they can protect investor information, do
background checks on those holding more than a 20 percent stake
in any issuer and ensure that potential investors understand the
risks of buying a tiny stake in a tiny company.

Finally, the JOBS law has set guidelines on how much people can
invest based on their annual income and net worth. The job of
making sure investors don't put too much skin in the game is
likely to fall to intermediaries.

Investors: In addition to fixed investment
levels, regulators will also have to decide how -- or if --
investors receive shareholder rights. Consumer advocates are
already airing a range of potential governance sticky spots --
from equity dilution to exits.

Meanwhile, Sherwood Neiss, founder of Crowdfund Capital Advisors
and a major force behind the JOBS Act, said intermediaries might
run out of capital before the market structure is in place. And
entrepreneurs frustrated with the wait are turning to
alternatives like peer-to-peer lending and royalty-based
financing deals.